How investing his 401k savings in whiskey made an entrepreneur millions

At age 44 Don Poffenroth made what some, including his wife, would consider a dubious decision. He invested all of his 401k retirement savings in shares of the startup business Dry Fly Distilling. But seven years later, he has no regrets. Dry Fly is an award-winning microdistillery with 5 employees and $2 million in annual sales.

“My retirement savings is way, way better off than if it had sat where it was for the same time. I’m millions of dollars ahead of the equation,” he says.

What gave Poffenroth such faith in that particular Spokane, Wash., spirits maker? He owns it.

Rolling your 401k savings into a plan that invests solely in your own privately held corporation is a strategy some say has numerous benefits. “We had the ability to go to a bank and we had potential investors,” Poffenroth says, “but this made it so the money was cheaper, and we didn’t have anybody breathing down our necks. It allowed us to take our time with no immediate payments to the bank or returns to the investor.”

David Nilssen, whose company Guidant Financial helped Poffenroth and his business partner Kent Fleischmann, as well as 6,000 other business owners, finance their own corporations with retirement assets, says his clients are “saving tremendous amounts of cash not having to service debt on a monthly basis.” He says Guidant expects to help another 2,000 entrepreneurs finance businesses this way in 2013.

The idea is different from cashing out your retirement accounts to fund a business, which has huge tax penalties. Instead, Nilssen explains: “You set up a corporation first; that’s the operating entity by which the small business will conduct itself. Then that business sets up a 401k plan that explicitly provides for holding private securities. Then the owner rolls existing assets into this plan and directs it to invest in the business.”

Nilssen says that, as risky as the idea sounds, 7 out of 10 people he explains it to say “that’s fantastic.” He adds, “That speaks to the entrepreneurial spirit people have.”

To be sure, Nilssen says the simple strategy, which was made possible by the Employee Retirement Income Security Act of 1974, is not for everyone. The typical entrepreneur who employs it is “sophisticated,” he says. “My average client is between 40 and 60, has a 700-plus FICO score, owns a home, is married, and has held a senior management position in corporate America for more than 15 years.”

Poffenroth and Fleischmann, for instance, had a combined 35 years of employment in the food industry with employers that contributed to their 401k plans. Their savings were substantial enough that they could fund half the distillery’s startup costs without moving 100 percent of their retirement assets.

As fly fishing buddies, Poffenroth and Fleischmann started in 2005 dreaming about owning a craft distillery that would translate all of the virtues of their sport—patience, timing, presentation—as well as the bounty of the Pacific Northwest, into their drink of choice—whiskey.

After spending a year and a half writing a business plan, they rolled their 401k plans over to invest in their new corporation in 2007. Each year since, Poffenroth says, the shares have increased in value as the company valuation climbs. Things could have gone the other way, he acknowledges. "In reality, [few] small businesses make it. We made it work, it was an interesting adventure, and it might be one of the smarter things I've ever done." He adds, “In hindsight, our 401ks would have tanked. We’ve come out smelling like a rose.” Or a well-crafted dram of small-batch bourbon.

Ed. Note: an earlier version of this article contained a numerical typo in 8th paragraph.